Annual Report 2008 - Ministry of Finance and Planning

1. Macro Economic Perspectives
25
Exchange Rates among Key Currencies were Highly
Volatile
Chart 1.7
Chart 1.6
The sharp volatility in exchange rates also made adjustment
in the exchange market more challenging, particularly in
the backdrop of prospects for recovery of world demand
being uncertain. While many currencies have shown drastic
adjustments in nominal exchange rates, in the context
of complex international market conditions and price
behaviours, the rupee also depreciated by 4 percent against
the dollar in 2008, unlike in the previous year.
External and Internal Shocks
Unprecedented High Oil Price
The international oil prices increased to unprecedented
levels with crude oil price per barrel reaching to US $ 147
in July 2008. Our country being totally import dependent
pertaining to oil, Ceylon Petroleum Corporation was
compelled to revise domestic oil prices.
The country’s oil bill alone was US $ 3,368 million in 2008,
a further increase of US $ 800 million during the year. The
outflow of foreign exchange caused a severe pressure on
the exchange rate and the trade deficit. The exceptionally
high oil prices compelled the Government to revise
domestic prices to prevent extra pressure on its budgetary
operations. However, as the Government was mindful
of price escalations in the domestic market and also of
consequential general cost increases, these revisions were
implemented as gradual adjustments. As a further measure,
the government also granted duty waivers to mitigate rising
prices of petroleum products and also maintained kerosene
prices at a subsidized rate for the benefit of vulnerable
segments in the society. The oil prices declined in the latter
part of the year enabling the government to reduce domestic
prices and reinstate formal taxes on petroleum products by
removing duty waivers granted during the period that high
prices prevailed.
Ministry of Finance and Planning Sri Lanka
Annual Report 2008